Business investment tax relief proposals ignore small businesses, worries ATT

The Association of Taxation Technicians (ATT) is concerned that proposed reforms of capital allowances overlook the needs of small businesses and may weaken the Government’s drive to foster a new culture of enterprise and growth in the UK.

The concerns are set out in ATT’s response to a government consultation¹ on potential reforms to the UK’s capital allowance regime announced in the 2022 Spring Statement. The suggested reforms include increasing the permanent level of the Annual Investment Allowance (AIA) – which allows most businesses to deduct the full amount of qualifying plant and machinery expenditure up to a set level to arrive at taxable profits – ,² increasing the rates of Writing Down Allowances (WDAs) which give tax relief for plant and machinery not covered by the AIA, introducing general First-Year Allowances (FYAs) for qualifying expenditure on plant and machinery, introducing an additional FYA and/or introducing permanent full expensing, which would allow all qualifying expenditure to be deducted in full as it arises.

Senga Prior, Chair of the ATT’s Technical Steering Group, said:

“We remind the Chancellor that capital allowances affect an extremely wide range of businesses, from the smallest unincorporated sole trader such as a plumber to the most complex multinational corporate group. He must avoid a one size fits all solution in the effort to support business investment or risk an expensive mistake that fails to foster a new culture of enterprise and growth in the UK.

“The reform options in his Spring Statement focus on the timing and level of relief for qualifying capital expenditure but they will have little or no impact on those smaller businesses which do not spend above the Annual Investment Allowance (AIA). A more pressing issue for smaller businesses is the complexity of the current capital allowance regime.

“Before he reports back on these proposals at the autumn 2022 Budget, we urge the Chancellor to look not only at how to incentivise greater capital investment by high-spending businesses but also at how to simplify the capital allowances rules for smaller businesses and make them more coherent. We also suggest setting an appropriate AIA limit and sticking to it, rather than making repeated, often last minute, changes which reduce certainty and can catch out smaller businesses.”³

The ATT explains that for the smallest businesses, investment decisions are dictated by commercial needs, not capital allowance incentives. By contrast, larger businesses are more likely to plan expenditure further in advance and to have more sophisticated decision-making processes. For example, if a plumber needs new tools or a van, they are likely to need them in the short term, rather than plan for their acquisition months in advance. They may expect that some form of tax relief is available without a deep consideration of the technicalities. The availability of a specific capital allowance incentive is therefore unlikely to drive a decision as to whether to invest at that time or not as the business need is key. Where they may have an impact, says the ATT, is if there is a choice between different assets with one providing for a better capital allowances position than the other (for example a car vs a van) or in the timing of expenditure close to the end of the tax or accounting year, which may require the business to seek advice, incurring advisor costs.

Senga Prior said:

“All sizes of business would benefit from a capital allowances regime which is stable and not subject to frequent changes. This would remove complications for smaller businesses where the AIA threshold is reduced as well as facilitating easier investment decisions for larger businesses.”

In separate comments, the ATT recommends the Government consider whether additional First-Year Allowances (FYA)⁴ could be converted into a payable tax credit for loss making companies (in a similar manner to the R&D regime).

Senga Prior said:

“This would provide valuable support for growing businesses looking to invest, as well as helping smaller businesses which may not be able to utilise their allowances other than in the form of a carried forward loss. But we note that this would come with an additional cost to the Exchequer and would have to be clearly defined to prevent tax avoidance.”